The Institutionalization of Venture Capital

A research paper in the journal Technovation makes a point that I’ve been making fairly regularly on this site:

Venture capital has changed under the influence of a new generation of industry participants. Competition for ever increasing pools of capital, combined with an increasingly homogenized experiential background for venture capitalists world-wide, has resulted in increased risk aversion and a preference for later stage investments than were the standard when the industry first achieved prominence.

Put plainly, the institutionalization of venture capital has had some unexpected consequences, not least of which is a race downstream away from real early-stage investing. It is partly a function of investing larger pools of capital, but it is also a function of venture capital increasingly being done by a cadre of high-gloss MBAs who are made nervous by your average unvarnished entrepreneur.

Comments

ah ha! so glad you found this. now i don’t feel alone in my thinking. My theory: with decreased capital flows to early stage/seed-level businesses, would-be entrepreneurs will not have the ability to gain critical start-up experience, leading to an eventual skills gap for the next generation of entrepreneurs. A core group of technologists who orbit in well-placed social networks will be the prime driver of new innovative technologies. Funded by university research and corporate R&D labs, company founders will serve less and less as visionaries and more and more like CTOs. The institutional entrepreneur serve a role in mitigating potential risk in the eyes of investors as they have ‘done there, done that.’ However, much of the value of entrepreneurship is the ability to tolerate risk and act from the gut, not the desk—this translates into a cadre of managers who actually are more risk averse (remember my ‘risk perversion’ theory?). By removing managerial uncertainty from the equation, potential upside (think real options) is vastly limited, leading to normal/expected returns—something the VC world does not like.
Here are a few stats i’ve been carrying around in my back pocket:
Data from PwC MoneyTree Survey, 1995-2004:
Size of average startup stage financing decreased 33% to $2,023,994
Size of average Early stage financing increased 34% to $4,619,263
Size of average Expansion stage financing increased 45% to $7,815,322
Size of average Later stage financing increased 88% to $11,125,857
Av # Deals/Startup stage decreased 61% to 171
Av # Deals/Early stage increased 64% to 841
Av # Deals/Expansion stage increased 72% to 1,217
Av #/Deals/Later stage increased 202% to 647
something to chew on..

In light of your post, you have to applaud VC’s like John Garcia of Angel Strategies. Although he’s got the full blown M&A pedigree from Nestle, he’s also been a phenomenally successful entrepreneur with two start to exit home runs to his credit.
As a VC, John truly walks the walk of the original breed; diligent and prudent, but with the appreciation of innovation and guts that it takes to make an entrepreneurial endeavor successful.
As the newest Executive in Residence at Angel Strategies (http://angelstrategies.com/as/scripts/index.php4) I can truly say that John understands the mind of the entrepreneur, understands how to appropriately value management and concept, and how to choose people not for what hangs on their office walls, but for what’s inside their heads and hearts.
Some business succeed against all odds and all rational reasoning, getting in early is what has made it possible for VC’s to yield the kind of massive returns that make investors dizzy and courageous.
It takes a rare intelligence for a VC to both get in early to reap the rewards for which VC is famous, but at the same time, avoid losing the investor’s money and putting the fund’s investing methodology in question.
The very fact that I, with an odd mix of science, technology, and multiple start-ups under my belt, would be invited to work with Angel Strategies, demonstrates that not all VC’s have followed the institutional path. While the success of John and the other Principal’s decisions clearly show that such a path is not the only means to successful Venture investing
Oliver Starr,
Exec. in Residence
Angel Strategies